Election in Japan: Will a New Government Revive Growth?

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Following three-and-a-half years of government marked by scandal, incompetence and hesitation in the face of a natural disaster, voters in Sunday's election in Japan voted in a new party.

Japanese voters turned their backs on the Democratic Party of Japan (DPJ) and returned the Liberal Democratic Party (LDP) to power in a landslide victory.

The LDP, which ruled Japan continuously for more than 50 years, has been chastened by its time in opposition and returns to power with a renewed vigor and strengthened belief in its core values.

Sunday's election, which had been characterized as a referendum on the future of nuclear power in Japan, actually turned out to be a vote in favor of competence and experience in governing.

Voters handed the LDP/Komei coalition a veto-proof majority of 325 seats in the Lower House of the Diet.

Under Japan's parliamentary system, if a bill passed by the Lower House is rejected by the Upper House, it can be resubmitted to the Lower House and become law if approved by a two-thirds majority. That means even the most radical LDP policies can become law over the objections of the opposition.

That's a good thing because LDP president Shinzo Abe, who will be the next prime minister, has some pretty radical ideas for dealing with Japan's economic malaise.

The New Key Economic Policies Post-Election in Japan

First, Abe plans to pass a massive 10 trillion yen ($120 billion) supplementary budget which will be spent during the January-March quarter. This money will be spent on public works and other construction projects.

In the aftermath of last year's devastating earthquake and nuclear accident (more on that later) there are plenty of things to spend money on: rebuilding the Tohoku area, retrofitting public buildings, such as schools and hospitals, to make them more earthquake resistant, repairing highways, bridges and tunnels; there is plenty to do before building another bridge to nowhere.

These projects will be funded primarily by issuing new Japanese government bonds (JGBs). Given that Japan already has a debt-to-GDP ratio of 237%, a massive new JGB issue could threaten the country's credit rating and possibly weaken the yen.

But Abe doesn't care.

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